UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q/A
Amendment
No. 1
x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2010
or
¨ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period
from to
Commission
file number 000-26422
DISCOVERY
LABORATORIES, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
94-3171943
|
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
|
|
2600
Kelly Road, Suite 100
|
||
|
Warrington,
Pennsylvania 18976-3622
|
||
|
(Address
of principal executive offices)
|
(215)
488-9300
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES x NO ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). YES ¨ NO ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer
|
¨
|
Accelerated
filer
|
x
|
|
|
Non-accelerated
filer
|
¨
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES ¨ NO x
As of
November 12, 2010, 206,652,815 shares of the registrant’s common
stock, par value $0.001 per share, were outstanding.
EXPLANATORY
NOTE
We are
filing this Amendment No. 1 to our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2010 (“Quarterly Report on Form 10-Q”), which was filed with the
Securities and Exchange Commission on May 10, 2010, to: (i) amend
Item 1 – “Financial Statements” to restate our financial statements
for the quarter ended March 31, 2010 to reflect the reclassification of certain
warrants from equity to liabilities, as discussed below, (ii) to make
corresponding amendments to the following sections Item 2 – “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
(“MD&A”): Results of Operations (first sentence, “Change in Fair Value of
Common Stock Warrant Liability,”) and Liquidity and Capital Resources – Cash
Flows – Cash Flows Used in Operating Activities, (iii) to amend Item 4 –
“Controls and Procedures” to reflect a reassessment of our disclosure
controls and procedures, and internal control over financial reporting, as of
March 31, 2010 in light of the restatement of our financial statements for the
quarter ended March 31, 2010, and (iv) to amend Part II – Item 1A – “Risk
Factors” to add to the risk factors previously provided in our Quarterly Report
on Form 10-Q additional risk factors related to the restatement of our financial
statements.
Other
than the foregoing, and the new certifications required by Rule 13a-14 under the
Securities and Exchange Act of 1934 (“Exchange Act”), our Quarterly Report on
Form 10-Q is not being amended or updated in any respect. This
Amendment No. 1 continues to describe the conditions as of the date of the
Quarterly Report on Form 10-Q, and, except as contained herein, we have not
modified or updated the disclosures contained in the Quarterly Report on Form
10-Q. This Amendment No. 1 should be read in conjunction with
our filings made with the SEC subsequent to the filing of the Quarterly Report
on Form 10-Q, including any amendment to those filings.
As
reported on our Current Report on Form 8-K filed on November 9, 2010, the Audit
Committee of our Board of Directors concluded that the financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2009,
and the Quarterly Reports on Form 10-Q for the periods ended March 31, 2010 and
June 30, 2010, should be restated to reclassify certain warrants that we
issued in May 2009 and February 2010 as liabilities based on a reassessment of
the applicable accounting guidance. See Note 2 to our consolidated
financial statements.
ii
Table
of Contents
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Page
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PART
I - FINANCIAL INFORMATION
|
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Item
1.
|
Financial
Statements
|
1
|
|
CONSOLIDATED
BALANCE SHEETS
|
||
|
As
of March 31, 2010 (unaudited) and December 31, 2009
|
1
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS (unaudited)
|
||
|
For
the Three Months Ended March 31, 2010 and 2009
|
2
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited)
|
||
|
For
the Three Months Ended March 31, 2010 and 2009
|
3
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
4
|
|
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition
|
|
|
and
Results of Operations
|
14
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
25
|
|
Item
4.
|
Controls
and Procedures
|
25
|
|
PART
II - OTHER INFORMATION
|
||
|
Item
1.
|
Legal
Proceedings
|
26
|
|
Item 1A.
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Risk
Factors
|
26
|
|
Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
28
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Item
6.
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Exhibits
|
28
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Signatures
|
29
|
iii
Unless
the context otherwise requires, all references to “we,” “us,” “our,” and the
“Company” include Discovery Laboratories, Inc., and its wholly-owned, presently
inactive subsidiary, Acute Therapeutics, Inc.
FORWARD-LOOKING
STATEMENTS
This
Amendment No. 1 contains “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 (“Securities Act”) and Section 21E of
the Exchange Act. The forward-looking statements include all matters
that are not historical facts. Forward-looking statements are only
predictions and provide our current expectations or forecasts of future events
and financial performance and may be identified by the use of forward-looking
terminology, including the terms “believes,” “estimates,” “anticipates,”
“expects,” “plans,” “intends,” “may,” “will” or “should” or, in each case, their
negative, or other variations or comparable terminology, though the absence of
these words does not necessarily mean that a statement is not
forward-looking. We intend that all forward-looking statements be
subject to the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. The forward-looking statements in this report are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical results or anticipated results, including
those set forth under “Risk Factors” and “Management's Discussion and Analysis
of Financial Conditions and Results of Operations” in our Annual Report on Form
10-K, as amended, and in our periodic reports on Forms 8-K and Form 10-Q, as
amended, and elsewhere in this Amendment No. 1.
Except to
the extent required by applicable laws, rules or regulations, we do not
undertake any obligation to update any forward-looking statements or to publicly
announce revisions to any of the forward-looking statements, whether as a result
of new information, future events or otherwise.
iv
PART
I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL
STATEMENTS
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
(in
thousands, except per share data)
|
March
31,
|
December
31,
|
|||||||
|
2010
(Unaudited)
|
2009
|
|||||||
|
(As
Restated)
|
(As
Restated)
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 24,172 | $ | 15,741 | ||||
|
Prepaid
expenses and other current assets
|
270 | 233 | ||||||
|
Total
Current Assets
|
24,442 | 15,974 | ||||||
|
Property
and equipment, net
|
4,444 | 4,668 | ||||||
|
Restricted
cash
|
400 | 400 | ||||||
|
Other
assets
|
223 | 361 | ||||||
|
Total
Assets
|
$ | 29,509 | $ | 21,403 | ||||
|
LIABILITIES
& STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,147 | $ | 1,294 | ||||
|
Accrued
expenses
|
3,531 | 3,446 | ||||||
|
Common stock
warrant liability
|
7,662 | 3,191 | ||||||
|
Loan
payable, including accrued interest
|
10,545 | 10,461 | ||||||
|
Equipment
loans and capitalized leases, current portion
|
472 | 597 | ||||||
|
Total
Current Liabilities
|
23,357 | 18,989 | ||||||
|
Equipment
loans and capitalized leases, non-current portion
|
405 | 428 | ||||||
|
Other
liabilities
|
673 | 690 | ||||||
|
Total
Liabilities
|
24,435 | 20,107 | ||||||
|
Stockholders’
Equity:
|
||||||||
|
Preferred
stock, $0.001 par value; 5,000 shares authorized; no shares issued or
outstanding
|
– | – | ||||||
|
Common
stock, $0.001 par value; 380,000 shares authorized; 154,325 and 126,689
shares issued, 154,012 and 126,376 shares outstanding
|
154 | 127 | ||||||
|
Additional
paid-in capital
|
371,313 | 361,503 | ||||||
|
Accumulated
deficit
|
(363,339 | ) | (357,280 | ) | ||||
|
Treasury
stock (at cost); 313 shares
|
(3,054 | ) | (3,054 | ) | ||||
|
Total
Stockholders’ Equity
|
5,074 | 1,296 | ||||||
|
Total
Liabilities & Stockholders’ Equity
|
$ | 29,509 | $ | 21,403 | ||||
See
notes to consolidated financial statements
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Operations
(Unaudited)
(in
thousands, except per share data)
|
Three Months Ended
|
||||||||
|
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
(As
Restated)
|
||||||||
|
Revenue
|
$ | – | $ | – | ||||
|
Expenses:
|
||||||||
|
Research
and development
|
4,133 | 5,607 | ||||||
|
General
and administrative
|
2,932 | 3,096 | ||||||
|
Total
expenses
|
7,065 | 8,703 | ||||||
|
Operating
loss
|
(7,065 | ) | (8,703 | ) | ||||
|
Change
in fair value of common stock liability
|
1,230 | - | ||||||
|
Other
income / (expense):
|
||||||||
|
Interest
and other income
|
19 | 5 | ||||||
|
Interest
and other expense
|
(242 | ) | (302 | ) | ||||
|
Other
income / (expense), net
|
(223 | ) | (297 | ) | ||||
|
Net
loss
|
$ | (6,058 | ) | $ | (9,000 | ) | ||
|
Net
loss per common share –
Basic and diluted |
$ | (0.04 | ) | $ | (0.09 | ) | ||
|
Weighted
average number of common shares outstanding – basic and
diluted
|
137,699 | 102,093 | ||||||
See notes to consolidated financial
statements
2
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
(Unaudited)
(in
thousands)
|
Three Months Ended
|
||||||||
|
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
(As
Restated)
|
||||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (6,058 | ) | $ | (9,000 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
482 | 516 | ||||||
|
Stock-based
compensation and 401(k) match
|
455 | 976 | ||||||
|
Fair
value adjustment of common stock warrants
|
(1,230 | ) | ||||||
|
Gain
on sale of equipment
|
(16 | ) | – | |||||
|
Changes
in:
|
||||||||
|
Prepaid
expenses and other current assets
|
(37 | ) | 287 | |||||
|
Accounts
payable
|
(147 | ) | (230 | ) | ||||
|
Accrued
expenses
|
85 | (160 | ) | |||||
|
Other
assets
|
1 | 1 | ||||||
|
Other
liabilities and accrued interest on loan payable
|
67 | 92 | ||||||
|
Net
cash used in operating activities
|
(6,398 | ) | (7,518 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of property and equipment
|
(57 | ) | (53 | ) | ||||
|
Restricted
cash
|
– | 200 | ||||||
|
Proceeds
from sales or maturity of marketable securities
|
– | 2,047 | ||||||
|
Net
cash used in investing activities
|
(57 | ) | 2,194 | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from issuance of securities, net of expenses
|
15,082 | 2,531 | ||||||
|
Principal
payments under equipment loan and capital lease
obligations
|
(196 | ) | (826 | ) | ||||
|
Net
cash provided by financing activities
|
14,886 | 1,705 | ||||||
|
Net
increase / (decrease) in cash and cash equivalents
|
8,431 | (3,619 | ) | |||||
|
Cash
and cash equivalents – beginning of period
|
15,741 | 22,744 | ||||||
|
Cash
and cash equivalents – end of period
|
$ | 24,172 | $ | 19,125 | ||||
|
Supplementary
disclosure of cash flows information:
|
||||||||
|
Interest
paid
|
$ | 21 | $ | 84 | ||||
|
Non-cash
transactions:
|
||||||||
|
Unrealized
loss on marketable securities
|
– | (1 | ) | |||||
|
Equipment
acquired through capitalized lease
|
48 | – | ||||||
See notes to consolidated
financial statements
3
Notes to Consolidated
Financial Statements (unaudited)
Restatement
of Historical Financial Statements
The
accompanying Consolidated Balance Sheet as of March 31, 2010 and the
Consolidated Statement of Operations and Cash Flows for the quarter ended March
31, 2010, have been restated in this report to reclassify certain warrants based
on a reassessment of the applicable accounting guidance, as discussed in Note
2
Note
1 – The Company and Basis of Presentation
The
Company
Discovery
Laboratories, Inc. (referred to as “we,” “us,” or the “Company”) is a
biotechnology company developing surfactant therapies to treat respiratory
disorders and diseases for which there frequently are few or no approved
therapies. Our novel KL4
proprietary technology produces a synthetic, peptide-containing surfactant
(KL4 surfactant)
that is structurally similar to pulmonary surfactant, a substance produced
naturally in the lung and essential for survival and normal respiratory
function. In addition, our proprietary capillary aerosol-generating
technology (capillary aerosolization technology) produces a dense aerosol with a
defined particle size, to potentially deliver our aerosolized KL4 surfactant
to the lung. As many respiratory disorders are associated with surfactant
deficiency or surfactant degradation, we believe that our proprietary technology
platform makes it possible, for the first time, to develop a significant
pipeline of surfactant products targeted to treat a wide range of previously
unaddressed respiratory problems.
We are
developing our lead products, Surfaxin®(lucinactant),
Surfaxin LS™ and Aerosurf®, to
address the most significant respiratory conditions affecting pediatric
populations. In April 2009, we received a Complete Response Letter from
the U.S. Food and Drug Administration (FDA) with respect to our New Drug
Application (NDA) for Surfaxin for the prevention of Respiratory Distress
Syndrome (RDS) in premature infants, our first product based on our novel
KL4
surfactant technology. The letter focused primarily on certain aspects of
our fetal rabbit biological activity test (BAT, a quality control and stability
release test for Surfaxin and our other KL4 pipeline products), specifically
whether analysis of preclinical data from both the BAT and a well-established
preterm lamb model of RDS demonstrates the degree of comparability that the FDA
requires and whether the BAT can adequately distinguish change in Surfaxin
biological activity over time. Based on meetings held in June and
September 2009 and other interactions with the FDA, we have optimized the BAT
and have recently completed the laboratory testing to re-validate the optimized
BAT. We expect to complete our revalidation efforts in
May 2010. See, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Overview – Business Strategy Update.”
Following completion of the BAT
optimization and revalidation, to address the sole remaining issue
for Surfaxin approval, we plan to initiate a comprehensive
program that will consist of a series of prospectively-designed, side-by-side
preclinical studies employing the optimized BAT and a well-established preterm
lamb model of RDS. We submitted the protocol for these
studies to the FDA for its review and now expect a written response from the FDA in May
2010. Subject to confirmation that we have satisfactorily revalidated the BAT, we expect to initiate the
side-by-side preclinical programs in the next few months. We believe that we remain on track to complete
our comprehensive program
and submit our Complete Response to the FDA in the
first quarter of 2011,
which could potentially lead to approval of Surfaxin for the
prevention of RDS in premature infants in 2011. If approved, Surfaxin
would be the first synthetic, peptide-containing surfactant for use in pediatric
medicine.
Surfaxin
LS, our lyophilized KL4
surfactant, is a dry powder formulation that is resuspended as a liquid prior to
use. Surfaxin LS is intended to improve ease of use for healthcare
practitioners, eliminate the need for cold-chain storage, and potentially
further improve clinical performance. Aerosurf is our proprietary KL4 surfactant
in aerosolized form, which we are developing using our capillary aerosolization
technology, initially to treat premature infants at risk for RDS.
Premature infants with RDS are treated with surfactants that are administered by
means of invasive endotracheal intubation and mechanical ventilation, procedures
that frequently result in serious respiratory conditions and
complications. If approved, we believe that Aerosurf will make it possible
to administer surfactant into the lung without subjecting patients to such
invasive procedures. We believe that Aerosurf has the potential to enable
a significant increase in the use of surfactant therapy in pediatric
medicine.
4
In
addition to our lead products, we plan over time to develop our KL4 surfactant
technology into a broad product pipeline that potentially will address a variety
of debilitating respiratory conditions for which there currently are no or few
approved therapies, in patient populations ranging from premature infants to
adults. Our plans include potentially taking these initiatives through a
Phase 2 proof-of-concept phase and, if successful, thereafter determining
whether to seek strategic alliances or collaboration arrangements or to utilize
other financial alternatives to fund their further development. We have
recently completed enrollment in a Phase 2 clinical trial of Surfaxin to
potentially address Acute Respiratory Failure (ARF) and expect that top line
results will be available in the second quarter 2010. Our KL4 surfactant
is also the subject of an investigator-initiated Phase 2a clinical trial
assessing the safety, tolerability and short-term effectiveness (via improvement
in mucociliary clearance) of aerosolized KL4 surfactant
in patients with Cystic Fibrosis (CF). We are conducting research and
preclinical development with our KL4 surfactant
potentially to address Acute Lung Injury (ALI), and, potentially in the future,
other diseases associated with inflammation of the lung, such as Asthma and
Chronic Obstructive Pulmonary Disease (COPD). We have also initiated
exploratory preclinical studies to assess the feasibility of using our KL4 surfactant
in combination with small and large molecule therapeutics to efficiently and
effectively deliver therapies to the lung to treat a range of pulmonary
conditions and disease.
An
important priority is to secure strategic and financial resources to potentially
maximize the inherent value of our KL4 surfactant
technology. We prefer to accomplish our objectives through strategic
alliances, including potential business alliances, and commercial and
development partnerships. With respect to our lead products, we are
engaged in discussions with potential strategic and/or financial partners.
To secure required capital, we are also considering other alternatives,
including additional financings and other similar opportunities. Although
we continue to consider a number of potential strategic and financial
alternatives, there can be no assurance that we will enter into any strategic
alliance or otherwise consummate any financing or other similar
opportunities. Until such time as we secure the necessary capital, we plan
to continue conserving our financial resources, predominantly by limiting
investments in our pipeline programs.
Basis
of Presentation
The
accompanying interim unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information in accordance with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normally recurring accruals)
considered for fair presentation have been included. Operating results for
the three months ended March 31, 2010 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2010. For
further information, refer to the consolidated financial statements and
footnotes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2009 that we filed with the Securities and Exchange Commission
(SEC) on March 10, 2010 (2009 Annual Report on Form 10-K).
Note
2 – Restatement of Financial Statements
In
this Amendment No. 1, we have restated our previously issued consolidated
financial statements and related disclosures for the quarter ended March 31,
2010, to correct errors in the accounting for certain
warrants. Specifically, we previously classified as equity
instruments warrants that should have been classified as derivative liability
instruments based on the terms of the warrants and the applicable accounting
guidance.
We have
historically accounted for warrants, which prior to May 2009 were issued in
private transactions, as equity instruments. Certain warrants issued
in registered transactions in May 2009 and February 2010 generally provide that,
in the event the related registration statement or an exemption from
registration is not available for the issuance or resale of the warrant shares,
the holder may exercise the warrant on a cashless
basis. However, notwithstanding the availability of cashless
exercise, generally accepted accounting principles establishes that, in the
absence of express agreement of the parties to the contrary, registered warrants
may be subject to net cash settlement, as it is not within the absolute control
of the issuer to provide freely-tradable shares in all
circumstances. The applicable accounting principles expressly do not
allow for an evaluation of the likelihood that an event would trigger cash
settlement.
5
The
accompanying quarterly financial statements have been restated to report the
warrants issued in May 2009 and February 2010 as derivative liabilities measured
at estimated fair value, calculated using the Black-Scholes option pricing
model:
|
Issuance
Date
|
Number
of Warrants Issued
|
Exercise
Price
|
Expiration
of Warrants
|
Fair
Value of Warrants at Issuance Date
|
|
(In
thousands)
|
||||
|
May
13, 2009
|
7,000,000
|
$1.15
|
May
13, 2014
|
$3,360
|
|
February
23, 2010
|
13,750,000
|
$0.85
|
February
23, 2015
|
$5,701
|
The
following tables summarize the effect of the restatement on the specific items
presented in our historical consolidated financial statements included in
our Quarterly Report on Form 10-Q for the quarter ended March 31,
2010:
|
Consolidated
Balance Sheet
|
March
31, 2010
|
March
31, 2010
|
||||||
|
(in
thousands)
|
(As
previously reported)
|
(As
restated)
|
||||||
|
Current
Liabilities:
|
||||||||
|
Common
stock warrant liability
|
$ | -- | $ | 7,662 | ||||
|
Total
Current Liabilities
|
15,695 | 23,357 | ||||||
|
Total
Liabilities
|
16,773 | 24,435 | ||||||
|
Stockholders’
Equity:
|
||||||||
|
Additional
paid-in-capital
|
380,573 | 371,313 | ||||||
|
Accumulated
deficit
|
(364,937 | ) | (363,339 | ) | ||||
|
Total
Stockholders’ equity
|
12,736 | 5,074 | ||||||
|
Consolidated Statement of Operations
|
Quarter Ended
March 31, 2010
|
Quarter Ended
March 31, 2010
|
||||||
|
(in thousands)
|
(As previously reported)
|
(As restated)
|
||||||
|
Change
in fair value of common stock warrant liability
|
$ | — | $ | 1,230 | ||||
|
Net
Loss
|
(7,288 | ) | (6,058 | ) | ||||
|
Loss
per share
|
$ | (0.05 | ) | $ | (0.04 | ) | ||
|
Consolidated Statement
of Cash Flows
|
Quarter
Ended
March
31, 2010
|
Quarter
Ended
March
31, 2010
|
||||||
|
(in
thousands)
|
(As
previously reported)
|
(As
restated)
|
||||||
|
Net
Loss
|
$ | (7,288 | ) | $ | (6,058 | ) | ||
|
Fair
value adjustment of common stock warrants
|
-- | (1,230 | ) | |||||
6
Note
3 – Liquidity Risks and Management’s Plans
We have
incurred substantial losses since inception, due to investments in research and
development, manufacturing and potential commercialization activities and we
expect to continue to incur substantial losses over the next several
years. Historically, we have funded our business operations through
various sources, including public and private securities offerings, draw downs
under our Committed Equity Financing Facilities (CEFFs), capital equipment and
debt facilities, and strategic alliances. We expect to continue to fund
our business operations through a combination of these sources, as well as sales
revenue from our product candidates, beginning with Surfaxin for the prevention
of RDS, if approved.
Following
receipt from the FDA of a Complete Response Letter for Surfaxin in April 2009,
we made fundamental changes in our business strategy. We now believe that
it is in our best interest financially to seek to develop and commercialize our
KL4
technology through strategic alliances or other collaboration arrangements,
including in the United States. However, there can be no assurance that
any strategic alliance or other arrangement will be successfully
concluded.
The
accompanying interim unaudited consolidated financial statements have been
prepared assuming that we will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business. As a result of our cash position as of December 31, 2009, the
audit opinion we received from our independent auditors for the year ended
December 31, 2009 contains a notation related to our ability to continue as a
going concern. Our ability to continue as a going concern is dependent on
our ability to raise additional capital, to fund our research and development
and commercial programs and meet our obligations on a timely basis. If we
are unable to successfully raise sufficient additional capital, through
strategic and collaborative arrangements with potential partners and/or future
debt and equity financings, we will likely not have sufficient cash flows and
liquidity to fund our business operations, which could significantly limit our
ability to continue as a going concern. In that event, we may be forced to
further limit development of many, if not all, of our programs and consider
other means of creating value for our stockholders, such as licensing the
development and/or commercialization of products that we consider valuable and
might otherwise plan to develop ourselves. If we are unable to raise the
necessary capital, we may be forced to curtail all of our activities and,
ultimately, cease operations. Even if we are able to raise additional
capital, such financings may only be available on unattractive terms, or could
result in significant dilution of stockholders’ interests and, in such event,
the market price of our common stock may decline. Our financial statements
do not include any adjustments relating to recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue in existence.
Our
future capital requirements will depend upon many factors, including our efforts
to secure one or more strategic alliances to support our product development
activities and commercialization plans, and the ultimate success of our product
development and commercialization plans. Currently, we are focused on
developing our lead KL4 surfactant
products to address the most significant respiratory conditions affecting
pediatric populations. However, there can be no assurance that our
research and development projects will be successful, that products developed
will obtain necessary regulatory approval, that any approved product will be
commercially viable, that any CEFF will be available for future financings, or
that we will be able to secure strategic alliances or obtain additional capital
when needed on acceptable terms, if at all. Even if we succeed in securing
strategic alliances, raising additional capital and developing and subsequently
commercializing product candidates, we may never achieve sufficient sales
revenue to achieve or maintain profitability.
As of
March 31, 2010, we had cash and cash equivalents of $24.2 million, which
includes net proceeds of $15.1 million ($16.5 million gross) from a
public offering that we completed in February 2010. As of May 7, 2010,
neither the May 2008 CEFF nor the December 2008 CEFF was available to us because
the closing market price of our common stock ($0.47) was below the minimum price
required ($1.15 and $0.60, respectively) to utilize the facility. If and
when the CEFFs become available, we may potentially raise (subject to certain
conditions, including minimum stock price and volume limitations) up to an
aggregate of $69.5 million. See, Note 5 –
Stockholders’ Equity, for details about our CEFFs.
As of
March 31, 2010, our $10.5 million loan with PharmaBio Development Inc
(PharmaBio), the former strategic investment subsidiary of Quintiles
Transnational Corp. (Quintiles), was classified as a current liability payable
on April 30, 2010. On April 28, 2010, we completed a restructuring of the
loan ($10.6M at the time of restructuring) pursuant to a Payment Agreement and
Loan Amendment dated April 27, 2010 (PharmaBio Agreement) that provided for
(a) payment in cash of an aggregate of $6.6 million, representing
$4.5 million in outstanding principal and $2.1 million in accrued
interest, (b) a maturity date extension for the remaining $4 million
principal amount under the loan, $2 million of which now will be due and
payable on July 30, 2010 and the remaining $2 million of which will be due
and payable on September 30, 2010, and (c) so long as we timely make each of the
remaining principal payments on or before their respective due dates, no further
interest will accrue on the outstanding principal amount. In addition, we
agreed to maintain (i) at least $10 million in cash and cash equivalents
until payment of the first $2 million installment is made on or before July
30, 2010, and (ii) at least $8 million in cash and cash equivalents until
the payment of the second $2 million installment on or before September 30,
2010, after which the PharmaBio loan will be paid in full. Also under the
PharmaBio Agreement, PharmaBio surrendered to us for cancellation warrants to
purchase an aggregate of 2,393,612 shares of our common stock that we had issued
previously to PharmaBio in connection with the PharmaBio loan and a previous
offering of securities. See, Note 9 – Subsequent
Events.
7
The
PharmaBio Agreement also provides that we and PharmaBio will negotiate in good
faith to potentially enter into a strategic arrangement under which PharmaBio
would provide funding for a research collaboration between Quintiles and us
relating to the possible research and development, and commercialization of two
of our drug product candidates, Surfaxin LS and Aerosurf, for the prevention and
treatment of RDS in premature infants. However, neither party is
obligated to enter into any such arrangement except to the extent that the
parties, in their individual and sole discretion, enter into definitive
documents with respect thereto. Accordingly, there can be no
assurances that any such arrangement will be completed. See, Note 9 – Subsequent
Events.
Also on
April 27, 2010, we entered into a Securities Purchase Agreement pursuant to
which PharmaBio agreed to purchase 4,052,312 shares of our common
stock and warrants to purchase an aggregate of 2,026,156 shares of common stock,
resulting in gross proceeds to us, on April 29, 2010, of $2.2 million
($2.1 million net). The shares of common stock and warrants were
sold as units, with each unit consisting of (a) one share of common stock, and
(b) one-half of a warrant to purchase a share of common stock, at an
offering price of $0.5429 per unit. The warrants generally will be
exercisable beginning 181 days after the date of issuance for a period of five
years from the original date of issuance at an exercise price of $0.7058 per
share. See,
Note 5 – Stockholders’ Equity, and Note 9 – Subsequent
Events.
Note 4 – Accounting Policies and Recent
Accounting Pronouncements
Accounting
policies
There
have been no changes to our critical accounting policies since December 31,
2009. For more information on critical accounting policies, see, Note 4 – “Summary of
Significant Accounting Policies and Recent Accounting Pronouncements” to
the consolidated financial statements included in our 2009 Annual Report on Form
10-K, as amended. Readers are encouraged to review those disclosures
in conjunction with the review of our Quarterly Report on Form 10-Q and
this Amendment No. 1.
Net loss per common
share
Basic net
loss per common share is computed by dividing the net loss by the weighted
average number of common shares outstanding for the periods. As of March
31, 2010 and 2009, 44.0 million and 24.8 million shares of common
stock, respectively, were potentially issuable upon the exercise of certain
stock options and warrants. Due to our net loss, these potentially
issuable shares were not included in the calculation of diluted net loss per
share as the effect would be anti-dilutive, therefore basic and dilutive net
loss per share are the same.
8
Comprehensive
loss
Comprehensive
loss consists of net loss plus the changes in unrealized gains and losses on
available-for-sale securities. Comprehensive loss for the three months
ended March 31, 2010 and 2009 are as follows:
|
For
the three months ended
|
||||||||
|
(in
thousands)
|
March
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
(As
restated)
|
||||||||
|
Net
loss
|
$ | (6,058 | ) | $ | (9,000 | ) | ||
|
Change
in unrealized gains/(losses) on marketable securities
|
– | (1 | ) | |||||
|
Comprehensive
loss
|
$ | (6,058 | ) | $ | (9,001 | ) | ||
Recent accounting
pronouncements
In
March 2010, ASU 2010-17, Revenue Recognition—Milestone Method
(Topic 605): Milestone
Method of Revenue Recognition—a consensus of the FASB Emerging Issues Task
Force (“ASU 2010-17”) was issued and will amend the accounting for
revenue arrangements under which a vendor satisfies its performance obligations
to a customer over a period of time, when the deliverable or unit of accounting
is not within the scope of other authoritative literature, and when the
arrangement consideration is contingent upon the achievement of a milestone. The
amendment defines a milestone and clarifies whether an entity may recognize
consideration earned from the achievement of a milestone in the period in which
the milestone is achieved. This amendment is effective for fiscal years
beginning on or after June 15, 2010, with early adoption permitted. The
amendment may be applied retrospectively to all arrangements or prospectively
for milestones achieved after the effective date. We do not believe the adoption
of this ASU will have a material impact on our financial
statements.
Note 5 – Stockholders’
Equity
Registered Public
Offerings
In
February 2010, we completed a public offering of 27.5 million shares of our
common stock and warrants to purchase 13.8 million shares of our common
stock, sold as units, with each unit consisting of one share of common stock and
a warrant to purchase 0.5 of a share of common stock, at a public offering price
of $0.60 per unit, resulting in gross proceeds to us of $16.5 million
($15.1 million net). This offering was made pursuant to a prospectus
supplement dated April 28, 2010 and an accompanying prospectus dated June 18,
2008 pursuant to our existing shelf registration statement on Form S-3 (File No.
333-151654), which was filed with the SEC on June 13, 2008 and declared
effective by the SEC on June 18, 2008 (2008 Shelf Registration
Statement). The warrants expire in February 2015 and are exercisable,
subject to an aggregate beneficial ownership limitation, at a price per share of
$0.85. The exercise price and number of shares of common stock issuable on
exercise of the warrants will be subject to adjustment in the event of any stock
split, reverse stock split, stock dividend, recapitalization, reorganization or
similar transaction. The exercise price and the amount and/or type of
property to be issued upon exercise of the warrants will also be subject to
adjustment if the Company engages in a “Fundamental Transaction” (as defined in
the form of warrant). The warrants are exercisable for cash only, except
that if the related registration statement or an exemption from registration is
not available for the resale of the warrant shares, the holder may exercise on a
cashless basis.
9
In May
2009, we completed a registered direct public offering of 14.0 million
shares of our common stock and warrants to purchase seven million shares of
common stock, sold as units to select institutional investors, with each unit
consisting of one share and a warrant to purchase 0.5 of a share of common
stock, at a price of $0.81 per unit, resulting in gross proceeds to
us of $11.3 million ($10.5 million net). This offering was made
pursuant to a prospectus supplement dated May 8, 2009 to the prospectus dated
June 18, 2008 included in our 2008 Shelf Registration
Statement. The warrants expire in May 2014 and are exercisable at a price
per share of $1.15. The exercise price and number of shares of common
stock issuable on exercise of the warrants will be subject to adjustment in the
event of any stock split, reverse stock split, stock dividend, recapitalization,
reorganization or similar transaction. The exercise price and the amount
and/or type of property to be issued upon exercise of the warrants will also be
subject to adjustment if the Company engages in a “Fundamental Transaction” (as
defined in the form of warrant). The warrants are exercisable for cash
only, except that if the related registration statement or an exemption from
registration is not available for the resale of the warrant shares, the holder
may exercise on a cashless basis.
Common Stock Offering with
PharmaBio Development Inc.
On
April 27, 2010, we entered into a Securities Purchase Agreement with
PharmaBio, as the sole purchaser, related to an offering of 4,052,312 shares of
common stock and warrants to purchase an aggregate of 2,026,156 shares of common
stock, sold as units, with each unit consisting of one share of common stock and
one half of a warrant to purchase a share of common stock, at an offering price
of $0.5429 per unit, representing the greater of (a) the
volume-weighted average sale price (“VWAP”) per share of the common stock on The
Nasdaq Global Market for the 20 trading days ending on April 27, 2010 and
(b) the last reported closing price of $0.5205 per share of the common
stock on The Nasdaq Global Market on such date. The offering resulted in
gross proceeds to us of $2.2 million ($2.1 million net). This
offering was made pursuant to a prospectus supplement dated April 28, 2010 to
the prospectus dated June 18, 2008 included in our 2008
Shelf Registration Statement. The warrants expire in April 2015
and generally will be exercisable beginning 181 days after the date of
issuance, subject to an aggregate beneficial ownership limitation of 9.9%, at a
price per share of $0.7058, which represents a 30% premium to the VWAP for the
20 trading days ending on April 27, 2010. The warrants are exercisable for
cash only, except that if the related registration statement or an exemption
from registration is not available for the resale of the warrant shares, the
holder may exercise on a cashless basis. See also, Note 9 –
Subsequent Events.
Committed Equity Financing
Facilities(CEFFs)
As of
March 31, 2010, we had two CEFFs with Kingsbridge Capital Limited (Kingsbridge),
under which Kingsbridge is committed to purchase, subject to certain conditions,
newly-issued shares of our common stock. The CEFFs, dated December 12,
2008 (December 2008 CEFF) and May 22, 2008 (May 2008 CEFF), allow us at our
discretion to raise capital for a period of three years ending February 6, 2011
and June 18, 2011, respectively, at the time and in amounts deemed suitable
to us. We are not obligated to utilize any of the funds available under
the CEFFs. Our ability to access funds available under the CEFFs is
subject to certain conditions, including stock price and volume
limitations.
Under the
December 2008 CEFF, as of March 31, 2010, we had 7.1 million shares
potentially available for issuance (up to a maximum of $17.7 million),
provided that the VWAP of our common stock on each trading day must be at least
equal to the greater of (i) $.60 or (ii) 90% of the closing price of our common
stock on the trading day immediately preceding the draw down period (Minimum
VWAP). Under the May 2008 CEFF, as of March 31, 2010, we had approximately
12.8 million shares potentially available for issuance (up to a maximum of
$51.7 million), provided that the VWAP on each trading day must be at least
equal to the greater of $1.15 or the Minimum VWAP. Use of each CEFF is
subject to certain other covenants and conditions, including aggregate share and
dollar limitations for each draw down. See, “Item 7 –Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Liquidity and Capital Resources – Committed Equity Financing Facilities (CEFFs)”
included in our 2009 Annual Report on Form 10-K. As of May 7, 2010,
neither CEFF is currently available because the market price of our common stock
is less than the minimum price required to utilize either CEFF.
To date,
we have not utilized our CEFFs in 2010. During 2009, we raised an
aggregate of $10.7 million from 10 draw-downs under our CEFFs.
If and when the closing market price of our common stock is at least equal
to the minimum price required under our CEFFs, we anticipate using them to
support our working capital needs and maintain cash availability in
2010.
10
Note 6
– Fair Value of Financial Instruments
We
adopted the provisions of ASC Topic 820, Fair Value Measurements and
Disclosures, which defines fair value, establishes a framework for
measuring fair value under GAAP and enhances disclosures about fair value
measurements.
Under ASC
Topic 820, fair value is defined as the exchange price that would be received
for an asset or paid to transfer a liability in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.
Valuation
techniques used to measure fair value must maximize the use of observable inputs
and minimize the use of unobservable inputs. The fair value hierarchy is
based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value
which are the following:
|
|
·
|
Level
1 – Quoted prices in active markets for identical assets and
liabilities. Level 1 is generally considered the most reliable
measurement of fair value under ASC
820.
|
|
|
·
|
Level
2 – Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
|
·
|
Level
3 – Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
|
Fair Value on a Recurring
Basis
Assets
and liabilities measured at fair value on a recurring basis are categorized in
the table below as of March 31, 2010:
|
Fair Value
|
Fair value measurement using
|
|||||||||||||||
|
(in thousands)
|
March 31,
2010 |
Level 1
|
Level 2
|
Level 3
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Money
markets (1)
|
$ | 21,890 | $ | 21,890 | $ | – | $ | – | ||||||||
|
Certificate
of deposit
|
400 | 400 | – | – | ||||||||||||
|
Total
Assets
|
$ | 22,290 | $ | 22,290 | $ | – | $ | – | ||||||||
|
Liabilities
|
||||||||||||||||
|
Common
stock warrant liability
|
$ | 7,662 | $ | – | $ | – | $ | 7,662 | ||||||||
(1)
Dreyfus Treasury & Agency Cash Management Fund.
The
following table summarizes the activity of Level 3 inputs measured on a
recurring basis for the quarter ended March 31, 2010:
11
|
(in thousands)
|
Fair Value Measurements of Common Stock
Warrants Using Significant Unobservable
Inputs
(Level 3)
|
|||
|
Balance
at December 31, 2009
|
$ | 3,191 | ||
|
Issuance
of common stock warrants
|
5,701 | |||
|
Change
in fair value of common stock warrant liability
|
(1,230 | ) | ||
|
Balance
at March 31, 2010
|
$ | 7,662 | ||
Note 7
– Stock Options and Stock-Based Employee Compensation
We
recognize all share-based payments to employees and non-employee directors in
our financial statements based on their grant date fair values, calculated using
the Black-Scholes option pricing model. Compensation expense related to
share-based awards is recognized ratably over the requisite service period,
typically three years for employees.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing formula that uses weighted average assumptions
noted in the following table.
|
March 31,
|
March 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Expected
volatility
|
99 | % | 81 | % | ||||
|
Expected
term
|
4.7
years
|
4.6
years
|
||||||
|
Risk-free
interest rate
|
1.7 | % | 2.1 | % | ||||
|
Expected
dividends
|
– | – | ||||||
The total
employee stock-based compensation for the three months ended March 31, 2010 and
2009 was as follows:
|
(in thousands)
|
Three Months Ended
|
|||||||
|
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Research
& Development
|
$ | 166 | $ | 209 | ||||
|
General
& Administrative
|
232 | 670 | ||||||
|
Total
|
$ | 398 | $ | 879 | ||||
As of
March 31, 2010, there was $1.8 million of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under
the Amended and Restated 1998 Stock Incentive Plan (1998 Plan) and the 2007
Long-Term Incentive Plan (2007 Plan). That cost is expected to be
recognized over a weighted-average vesting period of 1.1 years.
Note 8
– Contractual Obligations and Commitments
Former
CEO Commitment
In
connection with the resignation in August 2009 of Robert J. Capetola, Ph.D., our
former President, Chief Executive Officer and member of our Board of Directors,
we entered into a separation agreement and general release (the “Separation
Agreement”) dated August 13, 2009, that provided, among other things, for
periodic severance payments through the earlier of (i) May 3, 2010 (Severance
Period) or (ii) the date, if ever, of a Corporate Transaction (defined
below). Under the Separation Agreement, if a Corporate Transaction were to
occur during the Severance Period, Dr. Capetola would become entitled to receive
an additional severance payment of up to $1,580,000 or, if any such Corporate
Transaction were to constitute a Change of Control, a payment of up to
$1,777,500; provided, however, that in each
case, any such payment is reduced by the sum of the aggregate cash severance
amounts already paid under the Separation Agreement.
12
A
“Corporate Transaction” was defined in the Separation Agreement to
include one or more public or private financings that were completed during the
Severance Period and resulted in cash proceeds (net of transaction costs) to us
of at least $20 million received during the Severance Period or within 90
calendar days thereafter. From August 13, 2009 through February 23, 2010,
we raised approximately $21.0 million of aggregate net proceeds, consisting
of approximately $5.9 million from financing transactions under our CEFFs
throughout the period and $15.1 million from a public offering that was
completed on February 23, 2010. As these transactions satisfied the
criteria for a Corporate Transaction under the Separation Agreement, on March 3,
2010, we paid to Dr. Capetola an additional $1.06 million (less
withholding), representing $1.58 million reduced by the sum of the cash
severance amounts previously paid under the Separation Agreement, which totaled
approximately $0.52 million. At this time, our obligation to make
periodic payments under the Separation Agreement has been satisfied and no
further payments are due to Dr. Capetola.
The full
text of the Separation Agreement is attached to our Current Report on Form 8-K
that we filed with the SEC on August 19, 2009. For a summary of the
Separation Agreement, see, “Item 11– Executive
Compensation –Resignation of our President and Chief Executive Officer,” in our
Amendment No. 1 to our 2009 Annual Report on Form 10-K that we filed with the
SEC on April 30, 2010 (2009 Form 10-K/A).
Note
9– Subsequent Events
We
evaluated all events or transactions that occurred after March 31, 2010 up
through the date we issued these financial statements. During this period we did
not have any material recognized subsequent events, however, there was one
nonrecognized subsequent event described below:
Loan
Restructuring – PharmaBio Development Inc.
As of
March 31, 2010, our $10.5 million loan with PharmaBio was classified as a
current liability, payable on April 30, 2010. On April 27, 2010, we
entered into the PharmaBio Agreement and on April 28, 2010, completed a
restructuring of the loan ($10.6M at the time of restructuring). The
PharmaBio Agreement provided for (a) payment in cash of an aggregate of
$6.6 million, representing $4.5 million in outstanding principal and $2.1
million in accrued interest, (b) a maturity date extension for the
remaining $4 million principal amount under the loan, $2 million of which
now will be due and payable on July 30, 2010 and the remaining $2 million of
which will be due and payable on September 30, 2010, and (c) so long as we
timely make each of the remaining principal payments on or before their
respective due dates, no further interest will accrue on the outstanding
principal amount. In addition, we agreed to maintain (i) at least $10
million in cash and cash equivalents until payment of the first $2 million
installment is made on or before July 30, 2010, and (ii) at least
$8 million in cash and cash equivalents until the payment of the second
$2 million installment on or before September 30, 2010, after which the
PharmaBio loan will be paid in full. Also under the PharmaBio Agreement,
PharmaBio surrendered to us for cancellation the following warrants to purchase
an aggregate of 2,393,612 shares of our common stock that we had issued
previously to PharmaBio in connection with the PharmaBio loan and a previous
offering of securities: a warrant to purchase 850,000 shares of common stock at
$7.19 per share expiring on November 3, 2014, a warrant to purchase 1,500,000
shares of common stock at $3.58 per share expiring on October 26, 2013 and a
warrant to purchase 43,612 shares of the Company’s common stock at $6.875 per
share expiring on September 19, 2010.
The
PharmaBio Agreement also provided that we and PharmaBio would negotiate in good
faith to potentially enter into a strategic arrangement under which PharmaBio
would provide funding for a research collaboration between Quintiles and us
relating to the possible research and development, and commercialization of two
of our drug product candidates, Surfaxin LS and Aerosurf, for the prevention and
treatment of RDS in premature infants. However, neither party is obligated
to enter into any such arrangement except to the extent that the parties, in
their individual and sole discretion, enter into definitive documents with
respect thereto. Accordingly, there can be no assurances that any such
arrangement or collaboration will be completed.
13
Also, on
April 27, 2010, we entered into a Securities Purchase Agreement pursuant to
which PharmaBio agreed to purchase 4,052,312 shares of our common stock and
warrants to purchase an aggregate of 2,026,156 shares of our common stock,
resulting in gross proceeds to us, on April 29, 2010, of $2.2 million
($2.1 million net). The shares of common stock and warrants were sold
as units, with each unit consisting of (a) one share of common stock, and
(b) one-half of a warrant to purchase a share of common stock, at an
offering price of $0.5429 per unit. The offering price per unit was
calculated based on the greater of (a) the VWAP per share of the common stock on
The Nasdaq Global Market for the 20 trading days ending on April 27, 2010 and
(b) the last reported closing price of $0.5205 per share of the common stock on
The Nasdaq Global Market on such date. The warrants generally will be
exercisable beginning 181 days after the date of issuance for a period of five
years from the original date of issuance at an exercise price of $0.7058 per
share, which represents a 30% premium to the VWAP. The exercise price and
number of shares of our common stock issuable on exercise of the warrants will
be subject to adjustment in the event of any stock split, reverse stock split,
stock dividend, recapitalization, reorganization or similar transaction.
The exercise price and the amount and/or type of property to be issued upon
exercise of the warrants will also be subject to adjustment if we engage in a
“Fundamental Transaction” (as defined in the Warrant). This offering was
made pursuant to our 2008 Shelf Registration Statement. The
offering closed on April 30, 2010.
See Also, Note 3 – Liquidity Risks and Management’s Plans,
and Note 5 – Stockholders’ Equity – Common Stock Offering with PharmaBio
Development Inc. The full text of the PharmaBio Agreement, the
Warrant and the Securities Purchase Agreement is attached as exhibits to our
Current Report on Form 8-K that we filed with the SEC on April 28,
2010.
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
(“MD&A”) is provided as a supplement to the accompanying interim unaudited
consolidated financial statements and footnotes to help provide an understanding
of our financial condition, the changes in our financial condition and our
results of operations. This item should be read in connection with our
accompanying interim unaudited consolidated financial statements (including the
notes thereto) appearing elsewhere herein.
RESTATEMENT
OF PREVIOUSLY-ISSUED CONSOLIDATED FINANCIAL STATEMENTS
In this
Amendment No. 1, we have restated our previously-issued consolidated financial
statements and related disclosures for the quarter ended March 31, 2010 to
reclassify warrants that we issued in February 2010, based on a reassessment of
the applicable accounting guidance. We are also making corresponding
amendments to the following sections of MD&A: Results of Operations (first
sentence, “Change in Fair Value of Common Stock Warrant Liability,”) and
Liquidity and Capital Resources – Cash Flows – Cash Flows Used in Operating
Activities.
OVERVIEW
Discovery
Laboratories, Inc. (referred to as “we,” “us,” or the “Company”) is a
biotechnology company developing surfactant therapies to treat respiratory
disorders and diseases for which there frequently are few or no approved
therapies. Our novel KL4
proprietary technology produces a synthetic, peptide-containing surfactant
(KL4
surfactant) that is structurally similar to pulmonary surfactant, a substance
produced naturally in the lung and essential for survival and normal respiratory
function. In addition, our proprietary capillary aerosol-generating
technology (capillary aerosolization technology) produces a dense aerosol with a
defined particle size, to potentially deliver our aerosolized KL4 surfactant
to the lung. As many respiratory disorders are associated with surfactant
deficiency or surfactant degradation, we believe that our proprietary technology
platform makes it possible, for the first time, to develop a significant
pipeline of surfactant products targeted to treat a wide range of previously
unaddressed respiratory problems.
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We are
developing our lead products, Surfaxin®(lucinactant),
Surfaxin LS™ and Aerosurf®, to
address the most significant respiratory conditions affecting pediatric
populations. Our research and development efforts are currently focused on
the management of RDS in premature infants. We have filed a New Drug
Application (NDA) for our first product based on our novel KL4 surfactant
technology, Surfaxin for the prevention of Respiratory Distress Syndrome (RDS)
in premature infants, and received a Complete Response Letter from the U.S. Food
and Drug Administration (FDA) in April 2009. We believe that the RDS
market represents a significant opportunity from both a medical and a business
perspective. We further believe that Surfaxin, Surfaxin LS and
Aerosurf, have the potential to greatly improve the management of RDS and,
collectively, represent the opportunity, over time, to significantly expand the
current RDS worldwide annual market.
In
addition to our lead products, we plan over time to develop our KL4 surfactant
technology into a broad product pipeline that potentially will address a variety
of debilitating respiratory conditions for which there currently are no or few
approved therapies, in patient populations ranging from premature infants to
adults. We have recently completed enrollment in a Phase 2 clinical trial
of Surfaxin to potentially address Acute Respiratory Failure (ARF) and expect
that top line results will be available in the second quarter 2010.
Our KL4 surfactant
is also the subject of an investigator-initiated Phase 2a clinical trial
assessing the safety, tolerability and short-term effectiveness (via improvement
in mucociliary clearance) of aerosolized KL4 surfactant
in patients with Cystic Fibrosis (CF). We are conducting research and
preclinical development with our KL4 surfactant
potentially to address Acute Lung Injury (ALI), and, potentially in the future,
other diseases associated with inflammation of the lung, such as Asthma and
Chronic Obstructive Pulmonary Disease (COPD). We have also initiated
exploratory preclinical studies to assess the feasibility of using our KL4 surfactant
in combination with small and large molecule therapeutics to efficiently and
effectively deliver therapies to the lung to treat a range of pulmonary
conditions and disease.
An
important priority is to secure strategic and financial resources to potentially
maximize the inherent value of our KL4 surfactant
technology. We prefer to accomplish our objectives through strategic
alliances, including potential business alliances, commercial and development
partnerships. With respect to our lead products, we are engaged in
discussions with potential strategic and/or financial partners. In
addition, our plans include potentially taking our early stage exploratory
programs through a Phase 2 proof-of-concept phase and, if successful, thereafter
determining whether to seek strategic alliances or collaboration arrangements or
to utilize other financial alternatives to fund their further development.
To secure required capital, we are also considering other alternatives,
including additional financings and other similar opportunities. Although
we continue to consider a number of potential strategic and financial
alternatives, there can be no assurance that we will enter into any strategic
alliance or otherwise consummate any financing or other similar
opportunities. Until such time as we secure the necessary capital, we plan
to continue conserving our financial resources, predominantly by limiting
investments in our pipeline programs.
We have
focused our current resources on our lead products, primarily to address the
requirements to gain the potential approval of Surfaxin in the United
States. Until such time as we secure sufficient strategic and financial
resources to support the continuing development of our KL4 surfactant
technology and support our operations, we will continue to conserve our
resources, predominantly by curtailing and pacing investments in our pipeline
programs.
Business
Strategy Update
The
reader is referred to, and encouraged to read in its entirety “Item 1 –
Business” included in our 2009 Annual Report on Form 10-K, which contains a
discussion of our Business and Business Strategy, as well as information
concerning our proprietary technologies and our current and planned KL4 pipeline
programs.
The
following are updates to our Business Strategy:
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·
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Surfaxin for the
Prevention of RDS in Premature
infants
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In
response to written guidance received in February 2010 from the FDA, we are
performing a comprehensive preclinical program to potentially address the sole
remaining issue that was identified in the April 2009 Complete Response
Letter. The letter focused primarily on certain aspects of our fetal
rabbit biological activity test (BAT, a quality control and stability release
test for Surfaxin and our other KL4 pipeline
products), specifically whether analysis of preclinical data from both the BAT
and a well-established preterm lamb model of RDS demonstrates the degree of
comparability that the FDA requires and whether the BAT can adequately
distinguish change in Surfaxin biological activity over time. A key
component of the comprehensive preclinical program is to first satisfactorily
optimize and re-validate the BAT. To optimize the BAT, we executed a
protocol that was previously submitted to the FDA for review and comment.
We expect to complete our revalidation efforts in May 2010. Additionally,
we have been interacting with the FDA regarding other important aspects of the
comprehensive preclinical program, including our proposed study design and
success criteria. We plan to initiate a series of prospectively-designed,
side-by-side preclinical studies employing the optimized BAT and a
well-established preterm lamb model of RDS. We submitted the protocol for
these studies to the FDA for its review and expect a written response from the
FDA in the near future. Subject to confirmation that we have
satisfactorily revalidated the BAT, we expect to initiate the side-by-side
preclinical studies in the next few months. We believe that we remain on
track to complete our comprehensive program and submit our Complete Response to
the FDA in the first quarter of 2011, which could potentially lead to approval
of Surfaxin for the prevention of RDS in premature infants in the United States
in 2011.
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·
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Surfaxin LS and
Aerosurf Development
Programs
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We are
currently conducting important preclinical activities for both Surfaxin LS and
Aerosurf to support regulatory requirements for our planned clinical
programs. We are preparing to further engage the FDA and interact with
international regulatory agencies with respect to our planned Phase 3 clinical
program for Surfaxin LS and our Phase 2 clinical program for Aerosurf. We
are also taking steps to focus our capillary aerosolization device development
activities on the capillary aerosolization device that we expect will support
our Aerosurf clinical development programs. We intend to initiate these
clinical programs upon determining a final regulatory strategy and after
securing appropriate strategic alliances and necessary capital.
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·
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Phase 2 Clinical
Trials to Address Acute Respiratory Failure and Cystic
Fibrosis
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We have
recently completed enrollment in a Phase 2 clinical trial to determine whether
Surfaxin improves lung function and reduces the duration and related
risk-exposure of mechanical ventilation in children up to two years of age
diagnosed with Acute Respiratory Failure (ARF). ARF is a severe
respiratory disorder associated with lung injury, often involving surfactant
dysfunction. ARF occurs after patients have been exposed to serious
respiratory infections, such as influenza (including the type A serotype
referred to as H1N1) or respiratory syncytial virus (RSV). Top-line
results of this trial are now expected to be available in June
2010.
Our
aerosolized KL4 surfactant
is being evaluated in an investigator-initiated Phase 2a clinical trial in
Cystic Fibrosis (CF) patients. The trial is being conducted at a leading
research center, The University of North Carolina, and is further supported by
the Cystic Fibrosis Foundation. The trial has been designed to assess the
safety, tolerability and short-term effectiveness (via improvement in
mucociliary clearance) of aerosolized KL4 surfactant
in CF patients. Top line results for this trial are now expected in the
third quarter of 2010.
As of
March 31, 2010, we had cash and cash equivalents of $24.2 million, which
includes net proceeds of $15.1 million ($16.5 million gross) from a
public offering that we completed in February 2010. Currently, under our
two CEFFs, we may potentially raise (subject to certain conditions, including
minimum stock price and volume limitations) up to an aggregate of
$69.5 million. However, as of May 7, 2010, neither the May 2008 CEFF
nor the December 2008 CEFF was available because the market price of our common
stock price was below the minimum price required ($1.15 and $0.60, respectively)
to utilize the CEFFs. See, Note 5 –
Stockholders’ Equity, for details about our CEFFs.
As of
March 31, 2010, our $10.5 million loan with PharmaBio Development Inc., the
former strategic investment subsidiary of Quintiles Transnational Corp
(Quintiles), was classified as a current liability, payable on April 30,
2010. On April 28, 2010, we completed a restructuring of the
loan ($10.6M at the time of restructuring) under which we satisfied a portion of
the loan and, as a result, the principal amount is now reduced to
$4 million, $2 million of which will be due and payable on July 30,
2010 and the remaining $2 million of which will be due and payable on
September 30, 2010. For details of the terms of the restructuring, see, “– Liquidity and Capital
Resources – Debt – Loan with PharmaBio Development, Inc.” We and
PharmaBio also agreed to negotiate in good faith to potentially enter into a
strategic arrangement under which PharmaBio would provide funding for a research
collaboration between Quintiles and us relating to the research and development,
and commercialization of Surfaxin LS and Aerosurf for the prevention and
treatment of RDS in premature infants, although there can be no assurances that
any such arrangement or collaboration will be accomplished. Also on April
30, 2010, we completed an offering of common stock and warrants to PharmaBio,
resulting in gross proceeds to us of $2.2 million ($2.1 million
net). See, “– Liquidity
and Capital Resources – Common Stock Offerings – Financings under the 2008
Shelf Registration Statement.”
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Our
future capital requirements depend upon many factors, including the success of
our efforts to secure one or more strategic alliances or other collaboration
arrangements to support our product development activities and, if approved,
commercialization plans. There can be no assurance, however, that we will
be able to secure strategic partners or collaborators to support and advise our
activities, that our research and development projects will be successful, that
products developed will obtain necessary regulatory approval, that any approved
product will be commercially viable, that any CEFF will be available for future
financings, or that we will be able to obtain additional capital when needed on
acceptable terms, if at all. In addition to multiple strategic
alternatives, we continue to consider potential additional financings and other
similar opportunities to meet our capital requirements and continue our
operations. Even if we succeed in securing strategic alliances, raising
additional capital and developing and subsequently commercializing product
candidates, we may never achieve sufficient sales revenue to achieve or maintain
profitability.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements, in conformity with accounting principles
generally accepted in the United States, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. There have been no changes to our critical accounting
policies since December 31, 2009. For more information on critical
accounting policies, see our 2009 Annual Report on
Form 10-K. Readers are encouraged to review these disclosures in
conjunction with their review of this Form 10-Q.
RESULTS
OF OPERATIONS
The net
loss for the three months ended March 31, 2010 and 2009 was $6.1 million
(or $0.04 per share) and $9.0 million (or $0.09 per share),
respectively.
Research
and Development Expenses
Research
and development expenses for the three months ended March 31, 2010 and 2009 were
$4.1 million and $5.6 million, respectively. These costs are
charged to operations as incurred and are tracked by category, as
follows:
|
(
in thousands)
|
Three
Months Ended
March
31,
|
|||||||
|
Research
and Development Expenses:
|
2010
|
2009
|
||||||
|
Manufacturing
development
|
$ | 2,437 | $ | 3,126 | ||||
|
Development
operations
|
1,241 | 1,752 | ||||||
|
Direct
preclinical and clinical programs
|
455 | 729 | ||||||
|
Total Research &
Development Expenses (1)
|
$ | 4,133 | $ | 5,607 | ||||
|
(1)
|
Included
in research and development expenses are charges associated with
stock-based employee compensation in accordance with the provisions of ASC
Topic 718. For the three months ended March 31, 2010 and 2009, these
charges were $0.2 million and $0.2 million,
respectively.
|
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Manufacturing
Development
Manufacturing
development includes the cost of our manufacturing operations, quality assurance
and analytical chemistry capabilities to assure adequate production of clinical
and potential commercial drug supply for our KL4 surfactant
products, in conformance with current good manufacturing practices (cGMP).
These costs include employee expenses, facility-related costs, depreciation,
costs of drug substances (including raw materials), supplies, quality control
and assurance activities and analytical services, etc.
The
decrease of $0.7 million in manufacturing development expenses for the
three months ended March 31, 2010, as compared to the same period in 2009, is
primarily due to our efforts to conserve financial resources following receipt
of the April 2009 Complete Response Letter and purchases in the first quarter of
2009 of active ingredients for the production of Surfaxin.
For the
three months ended March 31, 2010 and 2009, manufacturing development expenses
included charges associated with stock-based compensation of $0.1 million
and $0.1 million, respectively.
Development
Operations
Development
operations includes: (i) medical, scientific, clinical, regulatory, data
management and biostatistics activities in support of our KL4 surfactant
development programs; (ii) medical affairs activities to provide scientific
and medical education support in connection with our KL4 surfactant
technology pipeline programs; (iii) design and development for the
manufacture of our novel capillary aerosolization systems, including an aerosol
generating device, the disposable dose delivery packets and patient interface
system necessary to administer Aerosurf for our planned Phase 2 clinical trials
and; (iv) pharmaceutical development activities, including development of a
lyophilized (dry powder) formulation of our KL4
surfactant. These costs include personnel, expert consultants, outside
services to support regulatory, data management and device development
activities, symposiums at key neonatal medical meetings, facilities-related
costs, and other costs for the management of clinical trials.
The
decrease of $0.5 million in development operations expenses for the three
months ended March 31, 2010, as compared to the same period in 2009, is
primarily due to our efforts to conserve financial resources following receipt
of the April 2009 Complete Response Letter, including a reduction of our
workforce and a restructuring of certain functions in research and development,
primarily medical affairs.
For the
three months ended March 31, 2010 and 2009, development operations expenses
included charges associated with stock-based compensation of $0.1 million
and $0.1 million, respectively.
Direct Preclinical and
Clinical Programs
Direct
pre-clinical and clinical programs include: (i) pre-clinical activities,
including toxicology studies and other pre-clinical studies to obtain data to
support potential Investigational New Drug (IND) and NDA filings for our product
candidates; (ii) activities associated with conducting human clinical
trials, including patient enrollment costs, external site costs, clinical drug
supply and related external costs such as contract research consultant fees and
expenses; and (iii) activities related to addressing the items identified
in the April 2009 Complete Response Letter.
Direct
pre-clinical and clinical programs expenses for the three months ended March 31,
2010 included: (i) costs associated with activities to address issues
identified in the April 2009 Complete Response Letter, including optimization
and re-validation of the optimized BAT; (ii) activities associated with the
ongoing Phase 2 clinical trial evaluating the use of Surfaxin in children up to
two years of age suffering with ARF; and (iii) pre-clinical and preparatory
activities for anticipated Phase 2 clinical trials for Surfaxin LS and Aerosurf
for RDS in premature infants.
The
decrease of $0.3 million in direct preclinical and clinical program
expenses for the three months ended March 31, 2010, as compared to the same
period in 2009, is primarily due to costs in the first quarter of 2009
associated with preclinical activities and product characterization testing of
our lyophilized form of Surfaxin, and our efforts to conserve financial
resources following receipt of the April 2009 Complete Response
Letter.
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In an
effort to conserve our financial resources, we plan to continue limiting
investments in preclinical and clinical programs until we have secured
appropriate strategic alliances and necessary capital. Where appropriate,
we plan to meet with U.S. and European regulatory authorities to discuss the
requirements for our regulatory packages, including potential trial design
requirements, to prepare for our planned clinical trials.
General
and Administrative Expenses
General
and administrative expenses consist primarily of the costs of executive
management, business and commercial development, finance and accounting,
intellectual property and legal, human resources, information technology,
facility and other administrative costs.
General
and administrative expenses for the three months ended March 31, 2010 and 2009
were $2.9 million and $3.1 million, respectively. Included in
general and administrative expenses for the three months ended March 31, 2010
was a one-time charge of $1.0 million associated with certain contractual cash
severance obligations to our former President and Chief Executive Officer.
Additionally, for the three months ended March 31, 2010 and 2009, general and
administrative expenses included charges associated with stock-based
compensation of $0.2 million and $0.7 million,
respectively.
Excluding
the one-time charge related to our severance obligation and charges associated
with stock based compensation, general and administrative expenses decreased
$0.7 million for the three months ended March 31, 2010, as compared to the
same period in 2009. The decrease was primarily due to investments in
pre-launch commercial capabilities in the first quarter of 2009 in anticipation
of the potential approval and commercial launch of Surfaxin. Following
receipt of the April 2009 Complete Response Letter for Surfaxin, to conserve our
cash resources, we curtailed investment in commercial capabilities, implemented
cost containment measures and reduced our workforce from 115 to 91
employees. The workforce reduction was focused primarily in our commercial
and corporate administrative groups. We also made a fundamental change in
our business strategy. To conserve financial resources, we no longer plan
to establish our own specialty pulmonary commercial organization and we are
instead seeking to develop and commercialize our KL4 technology
through strategic alliances or other collaboration arrangements, including in
the United States. Although we are engaged in discussions with potential
strategic and financial partners, there can be no assurance that any strategic
alliance will be successfully concluded. Until such time as we
secure an alliance or access to other capital, we continue to conserve our
financial resources by predominantly limiting investments in our pipeline
programs.
Change
in Fair Value of Common Stock Warrant Liability
We
account for common stock warrants in accordance with applicable accounting
guidance provided in ASC 815 - “Derivatives and Hedging – Contracts in
Entity’s Own Equity” (ASC 815), as either derivative liabilities or as equity
instruments depending on the specific terms of the warrant agreement. Derivative
warrant liabilities are valued using the Black-Scholes pricing model at the date
of initial issuance and each subsequent balance sheet date. Changes in
the fair value of the warrants are reflected in the consolidated statement of
operations as “Change in the fair value of common stock warrant
liability.”
The
change in the fair value of common stock warrant liability for the three months
ended March 31, 2010 resulted in income of $1.2 million due primarily to a
decrease in the Company’s common stock share price during the period.
Other
Income and (Expense)
Other
income and (expense) for the three months ended March 31, 2010 and 2009 were
$(0.2) million and $(0.3) million, respectively.
|
(Dollars
in thousands)
|
Three
months
ended
|
|||||||
|
March
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Interest
income
|
$ | 3 | $ | 5 | ||||
|
Interest
expense
|
(242 | ) | (302 | ) | ||||
|
Realized
gain on sale of equipment
|
16 | – | ||||||
|
Other
income / (expense), net
|
$ | (223 | ) | $ | (297 | ) | ||
Interest
income consists of interest earned on our cash and marketable securities.
To ensure preservation of capital, we invest most of our cash and marketable
securities in a treasury-based money market fund.
Interest
expense consists of interest accrued on the outstanding balance of our loan with
PharmaBio and under our equipment financing facilities. In addition,
interest expense includes expenses associated with the amortization of deferred
financing costs for the warrant that we issued to PharmaBio in October 2006 as
consideration for a restructuring of our loan in 2006. The decrease in
interest expense for the three months ended March 31, 2010 as compared to the
same periods for 2009 is due to a reduction in the outstanding principal
balances on our equipment loans.
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LIQUIDITY
AND CAPITAL RESOURCES
Overview
We have
incurred substantial losses since inception due to investments in research and
development, manufacturing and potential commercialization activities and we
expect to continue to incur substantial losses over the next several
years. Historically, we have funded our business operations through
various sources, including public and private securities offerings, draw downs
under our CEFFs, capital equipment and debt facilities, and strategic
alliances. We expect to continue to fund our business operations through a
combination of these sources, and, upon regulatory approval, also through sales
revenue from our product candidates, beginning with Surfaxin for the prevention
of RDS.
Following
receipt from the FDA of a Complete Response Letter for Surfaxin in April 2009,
we made fundamental changes in our business strategy. We now believe that
it is in our best interest financially to seek to develop and commercialize our
KL4
technology through strategic alliances or other collaboration arrangements,
including in the United States. However, there can be no assurance that
any strategic alliance or other arrangement will be successfully
concluded.
The
accompanying interim unaudited consolidated financial statements have been
prepared assuming that we will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business. As a result of our cash position as of December 31, 2009, the
audit opinion we received from our independent auditors for the year ended
December 31, 2009 contains a notation related to our ability to continue as a
going concern. Our ability to continue as a going concern is dependent on
our ability to raise additional capital, to fund our research and development
and commercial programs and meet our obligations on a timely basis. If we
are unable to successfully raise sufficient additional capital, through
strategic and collaborative arrangements with potential partners and/or future
debt and equity financings, we will likely not have sufficient cash flows and
liquidity to fund our business operations, which could significantly limit our
ability to continue as a going concern. In that event, we may be forced to
further limit development of many, if not all, of our programs and consider
other means of creating value for our stockholders, such as licensing the
development and/or commercialization of products that we consider valuable and
might otherwise plan to develop ourselves. If we are unable to raise the
necessary capital, we may be forced to curtail all of our activities and,
ultimately, cease operations. Even if we are able to raise additional
capital, such financings may only be available on unattractive terms, and/or
could result in significant dilution of stockholders’ interests and, in such
event, the market price of our common stock may decline. Our financial
statements do not include any adjustments relating to recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should we be unable to continue in
existence.
Our
future capital requirements will depend upon many factors, including our efforts
to secure one or more strategic alliances to support our product development
activities and commercialization plans, and the ultimate success of our product
development and commercialization plans. Currently, we are focused on
developing our lead KL4 surfactant
products to address the most significant respiratory conditions affecting
pediatric populations. In particular, in response to written
guidance received in February 2010 from the FDA, we are performing a
comprehensive preclinical program to potentially address the sole remaining
issue that was identified in the April 2009 Complete Response Letter to gain
Surfaxin approval. See “– Business Strategy Update.” There can
be no assurance that our research and development projects (including the
ongoing preclinical program for Surfaxin) will be successful, that products
developed will obtain necessary regulatory approval, that any approved product
will be commercially viable, that any CEFF will be available for future
financings, or that we will be able to secure strategic alliances or obtain
additional capital when needed on acceptable terms, if at all. Even if we
succeed in securing strategic alliances, raising additional capital, developing
product candidates and obtaining regulatory approval and subsequently
commercializing product candidates, we may never achieve sufficient sales
revenue to achieve or maintain profitability.
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As of
March 31, 2010, we had cash and cash equivalents of $24.2 million, which
includes net proceeds of $15.1 million ($16.5 million gross) from a
public offering that we completed in February 2010. As of May 7, 2010,
neither the May 2008 CEFF nor the December 2008 CEFF was available to us because
the closing market price of our common stock ($0.47) was below the minimum price
required ($1.15 and $0.60, respectively) to utilize the facility. If and
when the CEFFs become available, we may potentially raise (subject to certain
conditions, including minimum stock price and volume limitations) up to an
aggregate of $69.5 million. See, Note 5 –
Stockholders’ Equity, for details about our CEFFs.
As of
March 31, 2010, our $10.5 million loan with PharmaBio Development Inc
(PharmaBio), the former strategic investment subsidiary of Quintiles
Transnational Corp. (Quintiles), was classified as a current liability payable
on April 30, 2010. On April 28, 2010, we completed a restructuring of the
loan ($10.6M at the time of restructuring) pursuant to a Payment Agreement and
Loan Amendment dated April 27, 2010 (PharmaBio Agreement) that provided for
(a) payment in cash of an aggregate of $6.6 million, representing
$4.5 million in outstanding principal and $2.1 million in accrued
interest, (b) a maturity date extension for the remaining $4 million
principal amount under the loan, $2 million of which now will be due and
payable on July 30, 2010 and the remaining $2 million of which will be due
and payable on September 30, 2010, and (c) so long as we timely make each of the
remaining principal payments on or before their respective due dates, no further
interest will accrue on the outstanding principal amount. In addition, we
agreed to maintain (i) at least $10 million in cash and cash equivalents
until payment of the first $2 million installment is made on or before July
30, 2010, and (ii) at least $8 million in cash and cash equivalents until
the payment of the second $2 million installment on or before September 30,
2010, after which the PharmaBio loan will be paid in full. Also under the
PharmaBio Agreement, PharmaBio surrendered to us for cancellation warrants to
purchase an aggregate of 2,393,612 shares of our common stock that we had issued
previously to PharmaBio in connection with the PharmaBio loan and a previous
offering of securities. See, “– Debt – Loan with
PharmaBio Development, Inc.” Also, on April 30, 2010, we completed an
offering of common stock and warrants to PharmaBio, resulting in gross proceeds
of $2.2 million ($2.1 million net). See, “– Financings
Pursuant to Common Stock Offerings – Financings under the 2008
Shelf Registration Statement.”
To meet
our capital requirements, we continue to consider multiple strategic
alternatives, including, but not limited to potential business alliances,
commercial and development partnerships, additional financings and other similar
opportunities, although there can be no assurance that we will take any further
specific actions or enter into any transactions. Until such time as we
secure the necessary capital, we plan to continue conserving our financial
resources, predominantly by limiting investments in our pipeline
programs.
Cash
Flows
As of
March 31, 2010, we had cash and cash equivalents of $24.2 million compared
to $15.7 million as of December 31, 2009, an increase of
$8.5 million. In February 2010, we completed a public offering of
common stock and warrants resulting in net proceeds of $15.1 million.
Additionally, cash outflows before financings for the first quarter of 2010
consisted of $5.3 million used for ongoing operating activities, a one-time
payment of $1.1 million to satisfy certain contractual cash severance
obligations to our former President and Chief Executive Officer, and
$0.2 million used for debt service.
Cash Flows Used in Operating
Activities
Cash
flows used in operating activities were $6.4 million and $7.5 million
the three months ended March 31, 2010 and 2009, respectively.
Our cash
flows used in operating activities are a result of our net operating losses
adjusted for non-cash items associated with stock-based compensation, fair value
adjustment of common stock warrants, depreciation and changes in our accounts
payable, accrued liabilities and receivables. Cash flows used in operating
activities for the three months ended March 31, 2010 included a one-time payment
of $1.1 million to satisfy certain contractual cash severance obligations
to our former President and Chief Executive Officer.
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Cash Flows Used in Investing
Activities
Cash
flows used in investing activities included purchases of equipment of
$0.1 million and $0.1 million for the three months ended March 31,
2010 and 2009, respectively.
Cash Flows from/(used in)
Financing Activities
Cash
flows from financing activities were $14.9 million and $1.7 million
for the three months ended March 31, 2010 and 2009, respectively.
Cash
flows from financing activities for the three months ended March 31, 2010
primarily included net proceeds of $15.1 million from the February 2010
public offering, partially offset by principal payments on our equipment loan
and capital lease obligations of $0.2 million. See, “– Common Stock
Offerings – Financings under the 2008 Shelf Registration
Statement.” Cash flows used in financing activities for the three
months ended March 31, 2009 included $2.5 million from financings pursuant
to our CEFFs, partially offset by $0.8 million of principal payments under
our equipment loan.
Committed
Equity Financing Facilities (CEFFs)
As of
March 31, 2010, we had two CEFFs as follows: (i) the CEFF dated December 12,
2008 (December 2008 CEFF) and; (ii) the CEFF dated May 22, 2008 (May 2008 CEFF),
which allow us, subject to minimum price requirements and volume limitations, to
raise capital for a period of three years ending February 6, 2011 and June 18,
2011, respectively, at the time and in amounts deemed suitable to us.
Under the December 2008 CEFF, as of March 31, 2010, we had 7.1 million
shares potentially available for issuance (up to a maximum of
$17.7 million), provided that the volume weighted-average price of our
common stock (VWAP) on each trading day during the draw-down period must be at
least equal to the greater of (i) $.60 or (ii) 90% of the closing price of our
common stock on the trading day immediately preceding the draw down period
(Minimum VWAP). Under the May 2008 CEFF, as of March 31, 2010, we had
approximately 12.8 million shares potentially available for issuance (up to
a maximum of $51.7 million), provided that the VWAP on each trading day
must be at least the greater of $1.15 or the Minimum VWAP. Use of each
CEFF is subject to certain other covenants and conditions, including aggregate
share and dollar limitations for each draw down. See our 2009 Annual Report on
Form 10-K – “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Liquidity and Capital Resources – Committed Equity
Financing Facility (CEFF)”). We anticipate using our CEFFs (at such times
as our stock price is at a level above the CEFF minimum price requirement) to
support our working capital needs and maintain cash availability in
2010.
To date,
we have not used the CEFFs in 2010. As the current market price of our
common stock is below the minimum price ($0.60 and $1.15) required by the CEFFs,
neither CEFF is currently available. In 2009, we raised an aggregate of
$10.7 million from 10 draw-downs under our CEFFs throughout the
year.
Common
Stock Offerings
Historically,
we have funded, and expect that we may continue to fund, our business operations
through various sources, including financings in the form of common stock
offerings. In June 2008, we filed a universal shelf registration statement
on Form S-3 (No. 333-151654) (2008 Shelf Registration Statement) with
the SEC for the proposed offering from time to time of up to $150 million
of our securities, including common stock, preferred stock, varying forms of
debt and warrant securities, or any combination of the foregoing, on terms and
conditions that will be determined at that time.
22
Financings under the 2008
Shelf Registration Statement
On
April 27, 2010, we entered into a Securities Purchase Agreement with
PharmaBio, as the sole purchaser, related to an offering of 4,052,312 shares of
common stock and warrants to purchase an aggregate of 2,026,156 shares of common
stock, sold as units, with each unit consisting of one share of common stock and
a warrant to purchase 0.50 of a share of common stock, at an offering price of
$0.5429 per unit, representing the greater of (a) the
volume-weighted average sale price (“VWAP”) per share of the common stock on The
Nasdaq Global Market for the 20 trading days ending on April 27, 2010 and
(b) the last reported closing price of $0.5205 per share of the common
stock on The Nasdaq Global Market on such date. The offering resulted in
gross proceeds to us of $2.2 million ($2.1 million net). The
warrants expire in April 2015 and generally will be exercisable beginning
181 days after the date of issuance, subject to an aggregate beneficial
ownership limitation of 9.9%, at a price per share of $0.7058, which represents
a 30% premium to the VWAP for the 20 trading days ending on April 27,
2010. The exercise price and number of shares of common stock issuable on
exercise of the warrants will be subject to adjustment in the event of any stock
split, reverse stock split, stock dividend, recapitalization, reorganization or
similar transaction. The exercise price and the amount and/or type of
property to be issued upon exercise of the warrants will also be subject to
adjustment if the Company engages in a “Fundamental Transaction” (as defined in
the form of warrant). The warrants are exercisable for cash only, except
that if the related registration statement or an exemption from registration is
not available for the resale of the warrant shares, the holder may exercise on a
cashless basis. The offering closed on April 30, 2010.
In
February 2010, we completed a public offering of 27.5 million shares of our
common stock and warrants to purchase 13.8 million shares of our common
stock, sold as units, with each unit consisting of one share of common stock and
a warrant to purchase 0.5 of a share of common stock, at a public offering price
of $0.60 per unit, resulting in gross proceeds to us of $16.5 million
($15.1 million net). The warrants expire in February 2015 and are
exercisable, subject to an aggregate share ownership limitation, at a price per
share of $0.85. The exercise price and number of shares of common stock
issuable on exercise of the warrants will be subject to adjustment in the event
of any stock split, reverse stock split, stock dividend, recapitalization,
reorganization or similar transaction. The exercise price and the amount
and/or type of property to be issued upon exercise of the warrants will also be
subject to adjustment if the Company engages in a “Fundamental Transaction” (as
defined in the warrant agreement). The warrants are exercisable for cash
only, except that if the related registration statement or an exemption from
registration is not available for the resale of the warrant shares, the holder
may exercise on a cashless basis.
As of
March 31, 2010 and May 10, 2010, there was $122.2 million and
$120.0 million, respectively, remaining available under the 2008
Shelf Registration Statement for potential future
offerings.
Debt
Historically,
we have, and expect to continue to, fund our business operations through various
sources, including debt arrangements such as credit facilities and equipment
financing facilities.
Loan
with PharmaBio Development Inc.
As of
March 31, 2010, our $10.5 million loan with PharmaBio was classified as a
current liability, payable on April 30, 2010. On April 27, 2010, we
entered into the PharmaBio Agreement and on April 28, 2010, completed a
restructuring of the loan ($10.6M at the time of restructuring). The
PharmaBio Agreement provided for (a) payment in cash of an aggregate of
$6.6 million, representing $4.5 million in outstanding principal and $2.1
million in accrued interest, (b) a maturity date extension for the
remaining $4 million principal amount under the loan, $2 million of which
now will be due and payable on July 30, 2010 and the remaining $2 million of
which will be due and payable on September 30, 2010, and (c) so long as we
timely make each of the remaining principal payments on or before their
respective due dates, no further interest will accrue on the outstanding
principal amount. In addition, we agreed to maintain (i) at least $10
million in cash and cash equivalents until payment of the first $2 million
installment is made on or before July 30, 2010, and (ii) at least
$8 million in cash and cash equivalents until the payment of the second
$2 million installment on or before September 30, 2010, after which the
PharmaBio loan will be paid in full.
Also
under the PharmaBio Agreement, PharmaBio surrendered to us for cancellation the
following warrants to purchase an aggregate of 2,393,612 shares of our common
stock that we had issued previously to PharmaBio in connection with the
PharmaBio loan and a previous offering of securities: a warrant to purchase
850,000 shares of common stock, at $7.19 per share expiring on November 3, 2014,
a warrant to purchase 1,500,000 shares of common stock at $3.58 per share
expiring on October 26, 2013 and a warrant to purchase 43,612 shares of the
Company’s common stock at $6.875 per share expiring on September 19,
2010.
23
The
PharmaBio Agreement also provided that we and PharmaBio would negotiate in good
faith to potentially enter into a strategic arrangement under which PharmaBio
would provide funding for a research collaboration between Quintiles and us
relating to the possible research and development, and commercialization of two
of our drug product candidates, Surfaxin LS and Aerosurf, for the prevention and
treatment of RDS in premature infants. However, neither party is obligated
to enter into any such arrangement except to the extent that the parties, in
their individual and sole discretion, enter into definitive documents with
respect thereto. Accordingly, there can be no assurances that any such
arrangement or collaboration will be completed.
Also, on
April 27, 2010, we entered into a Securities Purchase Agreement pursuant to
which PharmaBio agreed to purchase 4,052,312 shares of our common stock and
warrants to purchase an aggregate of 2,026,156 shares of our common stock,
resulting in gross proceeds to us, on April 29, 2010, of $2.2 million
($2.1 million net). See, “ – Common Stock
Offerings – Financing under the 2008 Shelf Registration
Statement.”
At the
present time, we are focused on securing appropriate strategic and financial
resources to fund our research and development programs, comply with our
financial covenants under the restructured PharmaBio loan, and pay the principal
amount when due. Under our amended PharmaBio loan, PharmaBio holds a
security interest in substantially all of our assets, including our proprietary
assets and intellectual property. If we fail to comply with the cash
covenants required under the restructuring, PharmaBio would have the right to
declare all borrowings to be immediately due and payable. If we are unable
to pay when due amounts owed to PharmaBio, whether at maturity or in connection
with acceleration of the loan following a default, PharmaBio would have the
right to proceed against the collateral securing the indebtedness.
To secure
the necessary capital to achieve our objectives, we prefer to enter into
strategic alliances, including potential business alliances, and commercial and
development partnerships, including the potential collaboration with
Quintiles. We are also considering other alternatives, including
additional financings and other similar opportunities. However, there can
be no assurance that we will achieve any strategic alliance or otherwise
consummate any financing or other similar opportunities. If we are unable
to secure the necessary capital to meet our covenants and financial commitments,
we will be forced to potentially downsize our operations and implement further
cutbacks in our program.
Equipment Financing
Facilities
In May
2007, we entered into a Credit and Security Agreement with GE Business Financial
Services Inc. (GE, formerly Merrill Lynch Business Financial Services
Inc.). The right to draw under this Facility expired on November 30,
2008. As of March 31, 2010, approximately $0.4 million was
outstanding under the facility ($0.4 million classified as current
liabilities and $36,000 as long-term liabilities).
In
September 2008, we entered into a Loan Agreement and Security Agreement with the
Commonwealth of Pennsylvania, Department of Community and Economic Development
(Department), pursuant to which the Department made a loan to us from the
Machinery and Equipment Loan Fund in the amount of $500,000 (MELF Loan).
As of March 31, 2010, approximately $0.4 million was outstanding under the
facility ($0.1 million classified as current liabilities and
$0.3 million as long-term liabilities).
See, our 2009 Annual Report
on Form 10-K – “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Liquidity and Capital Resources – Debt – Equipment
Financing Facilities.”
Contractual Obligations and
Commitments
During
the three-month period ended March 31, 2010, there were no material changes to
our contractual obligations and commitments disclosures as set forth in our 2009
Annual Report on Form 10-K, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Liquidity and Capital Resources –
Contractual Obligations”, except as noted below.
24
In
connection with the resignation in August 2009 of Robert J. Capetola, Ph.D., our
former President, Chief Executive Officer and member of our Board of Directors,
we entered into a separation agreement and general release (the “Separation
Agreement”) dated August 13, 2009, that provided, among other things, for
periodic severance payments through the earlier of (i) May 3, 2010 (Severance
Period) or (ii) the date, if ever, of a Corporate Transaction (defined
below). Under the Separation Agreement, if a Corporate Transaction were to
occur during the Severance Period, Dr. Capetola would become entitled to receive
an additional severance payment of up to $1,580,000; provided, however, such payment
would be reduced by the sum of the aggregate cash severance amounts already paid
under the Separation Agreement.
A
“Corporate Transaction” was defined in the Separation Agreement to include one
or more public or private financings that were completed during the Severance
Period and resulted in cash proceeds (net of transaction costs) to us of at
least $20 million received during the Severance Period or within 90
calendar days thereafter. From August 13, 2009 through February 23, 2010,
we raised approximately $21.0 million of aggregate net proceeds, consisting
of approximately $5.9 million from financing transactions under our CEFFs
throughout the period and $15.1 million from a public offering that was
completed on February 23, 2010. As these transactions satisfied the
criteria for a Corporate Transaction under the Separation Agreement, on March 3,
2010, we paid to Dr. Capetola an additional $1.06 million (less
withholding), representing $1.58 million reduced by the sum of the cash
severance amounts previously paid under the Separation Agreement, which totaled
approximately $0.52 million. At this time, our obligation to make
periodic payments under the Separation Agreement has been satisfied and no
further payments are due to Dr. Capetola.
The full
text of the Separation Agreement is attached to our Current Report on Form 8-K
that we filed with the SEC on August 19, 2009. See also, “Item 11– Executive
Compensation – Resignation of our President and Chief Executive Officer,” in our
Amendment No. 1 to our 2009 Annual Report on Form 10-K that we filed with the
SEC on April 30, 2010 (2009 Form 10-K/A).
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Our
exposure to market risk is confined to our cash, cash equivalents and available
for sale securities. We place our investments with high quality issuers
and, by policy, limit the amount of credit exposure to any one issuer. We
currently do not hedge interest rate or currency exchange exposure. We
classify highly liquid investments purchased with a maturity of three months or
less as “cash equivalents” and commercial paper and fixed income mutual funds as
“available for sale securities.” Fixed income securities may have
their fair market value adversely affected due to a rise in interest rates and
we may suffer losses in principal if forced to sell securities that have
declined in market value due to a change in interest rates.
|
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
Evaluation of disclosure
controls and procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls or our internal control over
financial reporting will prevent all error and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments
in decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts
of some persons, by collusion of two or more people, or by management override
of the controls. The design of any system of controls is based in part on
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected. In designing and evaluating the disclosure controls and
procedures, our management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
25
In
connection with the preparation of this Amendment No. 1, our Interim Chief
Executive Officer and our Chief Financial Officer evaluated the effectiveness of
the design and operation of our disclosure controls and procedures as of March
31, 2010. In making this evaluation, they considered the material weakness
related to the classification of warrants discussed below. Solely as a
result of the material weakness, our Interim Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were not effective as of March 31, 2010.
Management’s
Report on our Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
promulgated under the Exchange Act. Our internal control system is
designed to provide reasonable assurance to our management and board of
directors regarding the preparation and fair presentation of published financial
statements. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. In connection with
this Amendment No. 1, management, including our Chief Executive Officer and
Chief Financial Officer, reassessed the effectiveness of our internal control
over financial reporting as of March 31, 2010. In making this
assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. This evaluation identified a material
weakness in our internal control regarding our process and procedures related to
the initial classification and subsequent accounting of registered warrants as
liabilities or equity instruments. This material weakness in our
internal controls resulted in the restatement of our 2009 financial statements
and our quarterly report for the period ended March 31,
2010. Accordingly, we did not maintain effective internal control
over financial reporting as of March 31, 2010, based on the COSO
criteria.
Changes in internal
controls
There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by Rule 13a-15(d) under the Exchange Act
that occurred during the quarter ended March 31, 2010 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART
II – OTHER INFORMATION
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
We are
not aware of any pending or threatened legal actions that would, if determined
adversely to us, have a material adverse effect on our business and
operations.
We have
from time to time been involved in disputes and proceedings arising in the
ordinary course of business, including in connection with the conduct of our
clinical trials. In addition, as a public company, we are also potentially
susceptible to litigation, such as claims asserting violations of securities
laws. Any such claims, with or without merit, if not resolved, could be
time-consuming and result in costly litigation. There can be no assurance
that an adverse result in any future proceeding would not have a potentially
material adverse effect on our business, results of operations and financial
condition.
|
ITEM
1A.
|
RISK
FACTORS
|
In
addition to the risks, uncertainties and other factors discussed in this Form
10-Q, see the risks and
uncertainties discussed in our 2009 Annual Report on Form 10-K and our 2009 Form
10-K/A, including the “Risk Factors” section contained in our 2009 Annual
Report on Form 10-K.
26
The terms of our indebtedness may impair our ability to conduct our business.
Our
capital requirements have been funded in part by the loan from PharmaBio, with
respect to which we completed a restructuring on April 28, 2010. Under the
restructuring, we paid in cash $6.6 million of the total outstanding
($10.6 million at the time of restructuring), representing
$4.5 million in outstanding principal and $2.1 million in accrued
interest. Of the remaining $4 million principal amount under the
loan, $2 million will now be due and payable on July 30, 2010 and the
balance of $2 million will be due and payable on September 30, 2010.
If we make our payments on time, no further interest will accrue on the
outstanding principal amount. The PharmaBio loan is secured by
substantially all of our assets, including our proprietary technologies, and
contains a number of covenants and restrictions that, with certain exceptions,
restricts our ability to, among other things, incur additional indebtedness,
borrow money or issue guarantees, use assets as security in other transactions,
and sell assets to other companies. In connection with the restructuring
we agreed to an additional covenant to maintain (i) at least $10 million in
cash and cash equivalents until payment of the first $2 million installment
is made on or before July 30, 2010, and (ii) at least $8 million in cash
and cash equivalents until the payment of the second $2 million installment
on or before September 30, 2010, after which the PharmaBio loan will be paid in
full. In order to comply with these cash covenants and to have sufficient
working capital to make payment of the remaining principal amount and
continue operate our business, we will likely need to secure sources of
additional capital. If we are unable to secure additional sources of
capital, we will be forced to further reduce our cash outflows and limit our
investments in our research and development programs. If we fail to comply
with the cash covenants required under the restructuring, PharmaBio would have
the right to declare all borrowings to be immediately due and payable. If
we are unable to pay when due amounts owed to PharmaBio, whether at maturity or
in connection with acceleration of the loan following a default, PharmaBio would
have the right to proceed against the collateral securing the
indebtedness.
Under the
restructuring, PharmaBio agreed to negotiate in good faith to potentially enter
into a strategic arrangement under which PharmaBio would provide funding for a
research collaboration between Quintiles and us relating to the possible
research and development, and commercialization of two of our drug product
candidates, Surfaxin LS and Aerosurf, for the prevention and treatment of RDS in
premature infants. In that event, it is possible that the remaining
principal payments might in the future be restructured, deferred or otherwise
satisfied without further cash outlays. However, neither party is
obligated to enter into any such arrangement and there can be no assurances that
any such arrangement will be completed or that we will be successful in securing
the additional capital required to continue our operations.
The restatement of our historical
financial statements has already consumed a significant amount of our time and
resources and may have a material adverse effect on our business and stock
price.
As
described earlier, we have restated our consolidated financial statements. The
restatement process was highly time and resource-intensive and involved
substantial attention from management and significant legal and accounting
costs. Although we have now completed the restatement, we cannot guarantee that
we will have no inquiries from the SEC or The NASDAQ Capital Market® (“Nasdaq
Capital Market”) regarding our restated financial statements or matters relating
thereto.
Any
future inquiries from the SEC as a result of the restatement of our historical
financial statements will, regardless of the outcome, likely consume a
significant amount of our resources in addition to those resources already
consumed in connection with the restatement itself.
Further,
many companies that have been required to restate their historical financial
statements have experienced a decline in stock price and stockholder lawsuits
related thereto.
27
If we fail to maintain an effective
system of internal control over financial reporting, we may not be able to
accurately report our
financial results, and current and potential stockholders may lose confidence in
our financial reporting.
We are
required by the SEC to establish and maintain adequate internal control over
financial reporting that provides reasonable assurance regarding the reliability
of our financial reporting and the preparation of financial statements in
accordance with generally accepted accounting principles. We are likewise
required, on a quarterly basis, to evaluate the effectiveness of our internal
controls and to disclose any changes and material weaknesses in those internal
controls.
As
described elsewhere in this Amendment No. 1, in connection with the restatement
process, we identified a material weakness with regard to accounting for warrant
instruments in our internal control over financial reporting, specifically with
regard to our prior interpretation of ASC 815, as it related to the initial
classification and subsequent accounting of registered warrants as either
liabilities or equity instruments dating back to May 2009. Upon a
reassessment of those financial instruments, in light of GAAP as currently
interpreted, we determined that we should have accounted for certain warrant
instruments as debt instead of equity. Given this material weakness with regard
to warrants, management was unable to conclude that we maintained effective
internal control over financial reporting as of March 31, 2010.
Since the
determination regarding this material weakness, we plan to devote significant
effort and resources to the remediation and improvement of our internal control
over financial reporting. While we have processes to identify and
intelligently apply developments in accounting, we plan to enhance these
processes to better evaluate our research and understanding of the nuances of
increasingly complex accounting standards. Our plans include the
following: enhanced access to accounting literature, research materials and
documents; and increased communication among our legal and finance
personnel and third party professionals with whom to consult regarding
complex accounting applications. The elements of our remediation plan can
only be accomplished over time and we can offer no assurance that these
initiatives will ultimately have the intended effects. Any failure to
maintain such internal controls could adversely impact our ability to report our
financial results on a timely and accurate basis. If our financial
statements are not accurate, investors may not have a complete understanding of
our operations. Likewise, if our financial statements are not filed on a
timely basis as required by the SEC and Nasdaq, we could face severe
consequences from those authorities. In either case, there could result a
material adverse affect on our business. Inferior internal controls could
also cause investors to lose confidence in our reported financial information,
which could have a negative effect on the trading price of our stock. We
can give no assurance that the measures we have taken and plan to take in
the future will remediate the material weaknesses identified or that any
additional material weaknesses or restatements of financial results will not
arise in the future due to a failure to implement and maintain adequate internal
control over financial reporting or circumvention of these controls. In
addition, even if we are successful in strengthening our controls and
procedures, in the future those controls and procedures may not be adequate to
prevent or identify irregularities or errors or to facilitate the fair
presentation of our consolidated financial statements.
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
During
the three months ended March 31, 2010, we did not issue any unregistered shares
of common stock pursuant to the exercise of outstanding warrants and
options. There were no stock repurchases during the three months ended
March 31, 2010.
For
disclosure on our working capital restrictions under our PharmaBio loan, please
refer to “Liquidity and Capital Resources – Overview.”
|
ITEM
6.
|
EXHIBITS
|
Exhibits
are listed on the Index to Exhibits at the end of this Quarterly Report.
The exhibits required by Item 601 of Regulation S-K, listed on such Index in
response to this Item, are incorporated herein by reference.
28
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Discovery
Laboratories, Inc.
|
|||
|
(Registrant)
|
|||
|
Date: November
12, 2010
|
By:
|
/s/ W. Thomas Amick
|
|
|
W.
Thomas Amick, Chairman of the Board and
Principal
Executive Officer
|
|||
|
Date: November
12, 2010
|
By:
|
/s/ John G. Cooper
|
|
|
John
G. Cooper
|
|||
|
President
and Chief Financial Officer (Principal
Financial
Officer)
|
|||
29
INDEX
TO EXHIBITS
The
following exhibits are included with this Quarterly Report on Form
10-Q.
|
Exhibit No.
|
Description
|
Method of Filing
|
||
|
3.1
|
Amended
and Restated Certificate of Incorporation of Discovery Laboratories, Inc.
(Discovery), dated December 9, 2009.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on December 9, 2009.
|
||
|
3.2
|
Certificate
of Designations, Preferences and Rights of Series A Junior Participating
Cumulative Preferred Stock of Discovery, dated February 6,
2004.
|
Incorporated
by reference to Exhibit 2.2 to Discovery’s Form 8-A, as filed with the SEC
on February 6, 2004.
|
||
|
3.3
|
Amended
and Restated By-Laws of Discovery, as amended effective September 3,
2009.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on September 4, 2009
|
||
|
4.1
|
Shareholder
Rights Agreement, dated as of February 6, 2004, by and between Discovery
and Continental Stock Transfer & Trust Company.
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on February 6, 2004.
|
||
|
4.2
|
Form
of Class A Investor Warrant.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on June 20, 2003.
|
||
|
4.3
|
Class
B Investor Warrant dated July 7, 2004, issued to Kingsbridge Capital
Limited.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K as
filed with the SEC on July 9, 2004.
|
||
|
4.4
|
Warrant
Agreement, dated as of November 3, 2004, by and between Discovery and
PharmaBio (formerly QFinance, Inc.)
|
Incorporated
by reference to Exhibit 4.1 of Discovery’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, as filed with the SEC on
November 9, 2004.
|
||
|
4.5
|
Class
C Investor Warrant, dated April 17, 2006, issued to Kingsbridge Capital
Limited
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 21, 2006.
|
||
|
4.6
|
Second
Amended and Restated Promissory Note, dated as of October 25, 2006, issued
to PharmaBio Development Inc. (“PharmaBio”)
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on October 26, 2006.
|
||
|
4.7
|
Warrant
Agreement, dated as of October 25, 2006, by and between Discovery and
PharmaBio
|
Incorporated
by reference to Exhibit 4.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on October 26, 2006.
|
||
|
4.8
|
Warrant
Agreement, dated November 22, 2006 by and between Discovery and Capital
Ventures International
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on November 22, 2006.
|
||
|
4.9
|
Warrant
Agreement dated May 22, 2008 by and between Kingsbridge Capital Limited
and Discovery.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K as
filed with the SEC on May 28,
2008.
|
|
Exhibit No.
|
Description
|
Method of Filing
|
||
|
4.10
|
Warrant
Agreement dated December 12, 2008 by and between Kingsbridge Capital
Limited and Discovery.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on December 15, 2008.
|
||
|
4.11
|
Form
of Stock Purchase Warrant issued in May 2009
|
Incorporated
by reference to Exhibit 10.3 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on May 8, 2009.
|
||
|
4.12
|
Form
of Stock Purchase Warrant issued in February 2010
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on February 18, 2010.
|
||
|
4.13
|
Warrant
Agreement, dated as of April 30, 2010, by and between Discovery and
PharmaBio
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 28, 2010.
|
||
|
10.1
|
Payment
Agreement and Loan Amendment (amending the Second Amended and Restated
Loan Agreement, dated as of December 10, 2001, amended and restated as of
October 25, 2006) dated April 27, 2010, by and between Discovery and
PharmaBio
|
Incorporated
by reference to Exhibit 1.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 28, 2010.
|
||
|
10.2
|
Third
Amended Promissory Note dated April 27, 2010 (amending and restating the
Second Amended Promissory Note dated as of October 25, 2006), payable to
PharmaBio
|
Incorporated
by reference to Exhibit 1.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 28, 2010.
|
||
|
10.3*
|
Retention
Letter dated May 4, 2010 by and between Robert Segal, M.D., F.A.C.P., and
Discovery
|
Incorporated
by reference to Exhibit 10.3 to Discovery’s Quarterly Report on Form 10-Q,
as filed with the SEC on May 10, 2010.
|
||
|
31.1
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange
Act.
|
Incorporated
by reference to Exhibit 31.1 to Discovery's Quarterly Report on Form 10-Q,
as filed with the SEC on May 10, 2010.
|
||
|
31.2
|
Certification
of Chief Financial Officer and Principal Accounting Officer pursuant to
Rule 13a-14(a) of the Exchange Act.
|
Incorporated
by reference to Exhibit 31.2 to Discovery's Quarterly Report on Form 10-Q,
as filed with the SEC on May 10, 2010.
|
||
|
31.3
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange
Act.
|
Filed
herewith.
|
||
|
31.4
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange
Act.
|
Filed
herewith.
|
|
Exhibit No.
|
Description
|
Method of Filing
|
||
| 32.1 |
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
Incorporated by reference to Exhibit 32.1 to Discovery's Quarterly Report on Form 10-Q, as filed with the SEC on May 10, 2010. | ||
|
32.2
|
Certification
of Principal Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Filed
herewith.
|
||
* A
management contract or compensatory plan or arrangement required to be filed as
an exhibit to this annual report pursuant to Item 15(b) of Form
10-K.
Exhibit
31.3
CERTIFICATIONS
I, W.
Thomas Amick, certify that:
1.
I have reviewed this
Amendment No. 1 to the Quarterly Report on Form 10-Q of Discovery Laboratories,
Inc.;
2.
Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3.
Based on my knowledge, the
financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other
certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other
certifying officer(s) and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
|
Date:
November 12, 2010
|
/s/ W. Thomas Amick
|
|
W.
Thomas Amick
Chairman
of the Board and Chief
Executive
Officer |
Exhibit
31.4
CERTIFICATIONS
I, John
G. Cooper, certify that:
1.
I have reviewed this
Amendment No. 1 to the Quarterly Report on Form 10-Q of Discovery Laboratories,
Inc.;
2.
Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3.
Based on my knowledge, the
financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other
certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other
certifying officer(s) and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
|
Date:
November 12, 2010
|
/s/ John G.
Cooper
|
|
John
G. Cooper
President
and Chief Financial
Officer
|
Exhibit
32.2
CERTIFICATIONS
Pursuant
to 18 U.S.C. § 1350, each of the undersigned officers of Discovery Laboratories,
Inc. (the “Company”) hereby certifies that, to his knowledge, the Company’s
Amendment No. 1 to the Company’s Quarterly Report on Form 10-Q for the period
ended March 31, 2010 (the “Report”) fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and that the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Date:
November 12, 2010
|
/s/ W. Thomas Amick
|
|
W.
Thomas Amick
|
|
Chairman
of the Board and Chief Executive Officer
|
|
/s/ John G. Cooper
|
|
John
G. Cooper
|
|
President
and Chief Financial Officer
|
A signed
original of this written statement required by Section 906 of the Sarbanes-Oxley
Act of 2002 has been provided to us and will be retained by us and furnished to
the SEC or its staff upon request.
This
certification is being furnished pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934.